Dividend Investing: Take This 4% Yield To The Bank

This is the second post in my dividend investing series. Today, I want to take a look at a large cap pharmaceutical stock with a juicy 4% yield. This company has undergone a lot of changes over the past few years. The company has turned from a major growth stock into a dividend stock. The former CEO quit 3 months and the company just hired a new one. The company made a major acquisition a few years ago that has added cash to the firm’s bottom line.

The company in question is Pfizer (PFE).

Pfizer is one of the largest biopharmaceutical company’s in the world with a market cap of $162 billion dollars. The company employs 116,500 people and derives revenue off of a variety of different drugs and consumer pharmaceutical products. Pfizer is number 140 on Fortune’s list of the 500 largest global companies. New CEO Ian Read was hired three months ago to guide the company through its recent change in the strategic direction of the company.

Pfizer has been in the deal making business in recent years with the company using acquisitions to make up for the lack of organic growth. Pfizer recently bought pharmaceutical giant Wyeth for $68 billion dollars last year. Pfizer expanded its product line of pain relief and management medication by acquiring King Pharmaceuticals. The total cost of the deal was $3.6 billion dollars in cash.

Pfizer’s Stock Valuation

Pfizer currently trades at 1.8 times book value, 2.4 times sales, and 14.3 times cash flow. The stock has a current P/E ratio just under 20 and a forward P/E ratio of 9.  Pfizer will have no trouble funding its dividend since the company has a whopping $28 billion dollars in cash and generates $9.9 billion dollars in free cash flow.

Pfizer just recently increased its dividend 11% to 80 cents per share. This equates to an even 4% yield. Pfizer has room for more dividend increases as the company is likely to double it earnings per share. EPS is expected to come in at $2.24 per share compared to $1.02 per share last year. The current payout rate is just 35% of this year’s earnings.  This is below the payouts of most competitors.

  • 66% dividend payout of GlaxoSmithKline
  • 61% payout of Bristol Myers Squibb
  • 46% payout of Eli Lilly
  • 41% dividend payout of Merck
  • 38% payout of Novartis

Pfizer’s growth days may be behind it but the stock is still an earnings giant with a fantastic balance sheet. Dividend investors looking for a stock with limited price appreciation but great income potential should consider Pfizer.

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11 Responses to “Dividend Investing: Take This 4% Yield To The Bank”

  1. Mark, I am following this series with interest. As part of my work as a Family CEO, I am making it my business to learn as much as I can about dividend investing. The information you’re providing is great.

  2. I’ve been looking at Pfizer recently. I had them a few years back as a speculative play when they had a drug in it’s final stages before approval. I sold off a little while back though. It might be time to check them out again. Thanks for the the analysis!

  3. avatar Evan says:

    I don’t know anything about the industry but doesn’t PFE have some drugs that are going to lose patent protection soon?

    • avatar Mark says:

      A few drugs have already come off of patent. Pfizer has been making deals acquiring drugmakers and has picked up 5 new drugs from its latest deal alone.

  4. avatar JT McGee says:

    I share in Evan’s concern. That said, Mark did say at the end that growth is over for PFE, and I tend to agree. The thesis here seems to be that you buy it as a future “holding company” of pharmaceuticals. Not a bad play, since pills are the last thing people cut back on, giving it an even better “margin of safety.”

    That said, it looks like someone is taking profits in the $20 area. Three touches since 2008, no break. Maybe we’ll see some consolidation, in which case that yield gets even fatter. I love when stocks go on sale :D

    • avatar Mark says:

      I love a good value stock too. I actually owned it in the low teens because the dividend yield was too tempting. I think that the dividend has room for significant increases.

  5. Mark, I owned PFE for quite a while, bought at $25 after lots of research and a belief that it was at a bottom. IT WASN’T. Finally sold it for a loss after several years and a realization that with a company so large, obtaining any sort of growth project/product large enough to impact the bottom line is very difficult. I’d go for a div ETF instead.

    • avatar Mark says:

      Barb, I bought shares of Pfizer when it was south of $15 because the 5% yield was too good to pass up. The stock rose and I sold. I think of Pfizer as a bond. Good yield but not growth.

  6. avatar Mike says:

    PFE went through quite a big change recently. They cut their dividend in half and made a major acquisition. Before this happened, the stock was trading at a very low valuation and it turned out to be a value trap. Lesson learned, because a major dividend cut is a black eye for a dividend investor (I didn’t own it at the time fortunately).

    If you are interested in buying this one, I would suggest considering JNJ and ABT also.
    JNJ trade as 12P/E and has been hampered by product recalls. The advantage to JNJ is that they derive most of their income on consumer products and not their drug pipelines.

    ABT trades at 16P/E and has good growth prospects due to its recent acquisitions (the most prominent being an Indian pharma company). It also yields over 4%.

    For my money, I don’t hold sizable positions in pharma, though at the right price I would buy JNJ and ABT.

    Mike

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